A Goose Chase: U.S. Unemployment and China

With unemployment in the United States stubbornly high at over 9 percent and elections on the horizon, pressure is building for Congress to take action to spur job creation. Some see China as the perfect target.At a Congressional hearing earlier this year, Dr. Robert Scott, an economist at the Economic Policy Institute, testified that the trade deficit with China had cost the United States 2.4 million jobs between 2001 and 2008. The statistic was then gleefully cited by legislators who gave testimony that day in support of their appeals for protectionism against China. But policymakers would be wise to ignore their siren calls. Contrary to what critics believe, China is not to blame for U.S. unemployment nor will action against China alleviate the problem. In fact, a reduction in Chinese imports may actually aggravate job losses by increasing the costs of production.The international economy is more complex than ever before, yet the tools with which we measure trade have been unchanged for a generation. Statisticians measure exports as the value of the a product when it leaves one country’s borders and enters another. But for the things we care about—jobs, wages, competitiveness—these measurements are a misleading guide. It would be far more useful to measure exports in terms of value-added, that is, the amount of work that is actually done in the country. Otherwise, we attribute countries with the value of work that their residents never performed.This distinction has important implications for the U.S.-China trade relationship. To illustrate, consider the iPhone. According to conventional trade data, China exported $2 billion dollars worth of iPhones in 2009. However, a mere $73.5 million —less than 4%—of the value-added activity actually occurred in China. The rest occurred in Germany, Japan, South Korea, and, yes, the United States. The story is similar for other products exported from China. Using current methodology, China is credited with export value that was actually produced elsewhere, including the United States. Instead, if we measured the U.S.-China trade relationship by value-added, the bilateral trade deficit would shrink by half , at least. Consequently, we should be skeptical of any claims that there are real effects, such as job losses, that stem merely from the way in which we measure trade.There are also common-sense problems with the assertion that China is creating unemployment in the United States. To come up with his 2.4 million jobs statistic, Dr. Scott took estimates of the numbers of jobs created by exports and applied them to imports, inferring that every dollar of imports is a drag on U.S. employment. But this is untrue . To see why, consider Ecuador, a country that the United States has run a trade deficit with for decades. U.S. workers are perfectly capable of producing cut flowers, one of Ecuador’s main exports , but does anyone believe that there are workers on U.S. unemployment rolls waiting for their jobs in the cut-flower industry to return? Certainly not. This is because imports provide us with goods, like cut flowers, that we could produce, but would choose not to. Instead of growing flowers, we devote human resources to other services that we desire, such as nursing and education. Human resources do not simply sit on the sidelines.But what of unemployment? Certainly, the United States has high unemployment, but it is not clear that China—or imports more broadly—are the cause of it. Suppose China’s currency did appreciate and Chinese goods became more expensive, does it follow that more jobs will come to the United States? This is unlikely. The rapid growth of China’s employment in recent years has come largely at the expense of workers in other developing countries —such as Mexico—not those in the United States. Even if we could bring in textile and low-end assembly jobs from China, unemployed American workers would have to adjust to these jobs just as they would to jobs in nursing or education. If these workers must endure painful adjustment in either case, why not have them adapt to jobs appropriate for the U.S. economy? Such jobs would have a long-term future, unlike the jobs that protectionism may be able to temporarily squeeze out of China.Furthermore, U.S. jobs depend on cheap imports—over fifty percent of U.S. imports are intermediate goods. If imports became more expensive, so would U.S.-produced goods and services, making them less competitive. More expensive imports would also deprive consumers of purchasing power. If consumers are forced to spend more to get the same amount of toys and textiles, it means they will have less to spend elsewhere. This would reduce the demand for domestic goods and services and thus the demand for U.S. jobs.Action against China is likely to be counterproductive for U.S. employment. Policymakers have resisted the misguided calls to disrupt trade with China thus far, but they must remain vigilant. If tempted to take action against China, they should remember that U.S. unemployment is a domestic problem. Hunting in China for solutions to the U.S. unemployment problem is nothing but a goose chase.

Photo courtesy of sasanf via Flickr.